CalPERS' return on investments appears negligible

The giant investment fund that feeds the state's public employee retirement system contributed far less than expected to the pension kitty last year, fueling a longstanding debate over how much the system can – or should – rely on investments to cover retirement costs in the long haul.

The California Public Employees' Retirement System, or CalPERS, expects 7.5 percent in annualized rate of return on its more than $200 billion in investments. The expectation was revised downward last year from 7.75 percent, CalPERS' expectation of more than a decade.

But in the fiscal year ending June 30, 2012, the system got just a 0.14 percent net return on its billions in investments, according to CalPERS' Comprehensive Annual Financial Report for the 2011-12 fiscal year. The fund ended the fiscal year with $237 billion, down from $241 billion at the end of the previous fiscal year.

Public equities lost about 7 percent, but other investments, including real estate, performed well enough to keep the system's entire portfolio out of the red – barely, the report said.

While CalPERS lost on its public equities investments, U.S. domestic markets gained in the year ending June 30, 2012. The S& P 500 gained 1.68 percent, the Dow Jones Industrial Average gained 2.36 percent, and the NASDAQ gained 4.23 percent.

The Euro Stoxx 50 Index, a European index fund, lost 21.25 percent during the year ending June 30, 2012. The Hang Seng Index, a Chinese index fund, lost 13.2 percent in the same time period, while the Nikkei 225 Index, a Japanese index fund, lost 8.73 percent and the FTSE 100 Index, a United Kingdom index fund, lost 6.99 percent.

CalPERS officials declined to comment on specific investment strategies, but a spokeswoman provided a report that suggested trouble spots in the portfolio were overseas investments, including investments in Turkey, Brazil and Russia.

In a statement released in July, CalPERS officials blamed the poor performance of the system's portfolio on “the ongoing European debt crisis and slowing global economic growth increased market volatility and reduced equity returns.”

Dan Pellissier of California Pension Reform, which wants to overhaul the state's public employee retirement system, said CalPERS could have gotten better returns on its investments if officials had “bet on America” and invested in an index fund such as the S& P 500.

The move also would have saved CalPERS tremendous amounts of money on financial consultants, Pellissier said.

“They (CalPERS) spend a lot of money trying to beat the market, and it's not going to happen,” Pellissier said. “When you're CalPERS, you have to invest in the losers, too, because you're just too big.”

In July, CalPERS officials had reported that the portfolio returned about 1 percent during fiscal 2012 but later revised that down to 0.14 percent after receiving and compiling all the earnings reports for the year.

“It's important to remember that CalPERS is a long-term investor, and one year of performance should not be interpreted as a signal about our ability to achieve our investment goals over the long term,” Henry Jones, Chair of CalPERS Investment Committee, said in the July statement.

Brad Pacheco, a spokesman for CalPERS said Friday that the fund's investments had earned returns that were close to expectations over the long haul, despite the damage caused by the economic downturn in 2008.

“We're all dependent on the economy and the markets, but our fiscal performance to date is about 7 percent,” Pacheco said. “But I don't want to sugarcoat it, because those years of downturn did raise costs for employers and taxpayers.”

MARKETS FAIL; TAXPAYERS PAY

When investments earn less than expected, public workers and the agencies that employ them have to put extra money into the pension system's coffers so everything pencils out in the end. When investments earn more than expected, workers and public agencies have to contribute less.

The disappointing returns in the last fiscal year meant CalPERS expected to bill public agencies up to 2 percent of payroll – on top of the bill agencies were expecting – either next year or two years from now, according to the report. The following fiscal year's bill will be bigger, too, by a fraction of one percent, even if the system's investments earn the expected 7.5 percent.

If the investments perform poorly in the next fiscal year, agencies can expect an even bigger bill.

Public pension reformers say CalPERS' expectation of 7.5 percent return is way too optimistic. They say counting on investments that won't deliver is among the system's tricks to keep taxpayer contributions artificially low, so the costs of covering public retirement look smaller than they actually are.

The extra 2 percent agencies are expected to pay in the coming years isn't an added cost, but a figure slightly closer to the actual cost of what the pensions agencies have already promised workers, Pellissier argued.

“People already owe those bills,” Pellissier said. “The system is just not presenting them.”

A few years of smaller-than expected returns on investments also hurt the retirement system's overall health, according to the report. The system's level of funding – or the percentage of promised benefits the fund has money to cover – fell to about 70 percent by June 30, 2012, Pacheco said. Most public pension experts consider 80 percent funding acceptable.

Pacheco stressed that no pensions are in jeopardy for the time being, but the system will have to rely more on taxpayers if investments continue to perform poorly.

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